Pocket money - the ins and outs of what is best

“Deciding on when and how much pocket money to give your children is important when it comes to raising sensible, independent children who can understand the value of money.”  I am often asked about this as a Certified Financial Planner® and radio presenter.  Kirsty Scully, Core Wealth Managers, Cape Town

Pocket money is definitely one of the best tools to use to teach children the correlation between work and money.  For this reason, many parents see it as a ‘win-win’ situation when they are able to offer pocket money to their children in return for some chores around the house.  However, there are also parents of the opinion that children should be encouraged to do chores around the house without any form of pay back.  As a mom, I have found that it needs to be something in between the two, as I will explain later.

Why give pocket money?

Pocket money teaches children lots of things about money:

Earning power  -  I get paid for what I do

Spending power  -  Once I’ve spent it, it’s gone

Saving power  -  I have the power to save up for an item I wish to buy

Borrowing power   -  I can borrow, but it is tough to have to pay it back

When should I start to give pocket money?

Children as young as 5 or 6 can start to understand the value of money.  Personally, I wouldn’t start before then, as they are unlikely to have grasped the concept of needing money to buy things and of understanding that if all the money is spent now then there will be nothing left afterwards.

There are three main methods for paying pocket money:

1.        A reward system or a set amount

This is an ideal system for children under the age of 8.  They need to help with simple household tasks and then they receive the money regardless of whether they do the tasks or not.  This avoids it feeling like a ‘bribe’ that you are giving them.  Children under 8 can do tasks such as sorting the clothes washing into different colour piles, making their beds, simple cooking, and help with drying the dishes.  As they get older, these chores can include doing the dishes, sweeping, hanging out the washing, picking up the dog poop and making meals.  For young children, I would recommend that they receive their pocket money on a weekly basis.

2.        An income system

For older children, starting around 10 years of age, you can introduce a system where they are paid for doing additional jobs such as cleaning the swimming pool, clearing out the gutters before winter starts, babysitting or washing the car.  Doing jobs such as these will help children realise that the harder one works, the higher the pay is likely to be.  However, in addition it will teach them valuable tips such as how electricity works (when they change the light bulbs) and how to care for a garden (when they fertilize the flower beds).

As the child gets older, I would recommend that they move on to being paid their pocket money on a monthly basis.  This can be done at the end each month and will then teach them how to learn to ‘stretch’ money out over a month.

  

3.        An allowance system

This is the system which I recommend for older teenagers.  They continue to have responsibilities as discussed above; however, you pay them a higher basic pocket money amount which needs to then be used for payment of essential things such as clothes, transport and entertainment.  At this stage it gives them the opportunity to manage a budget, and ensure that their money ‘lasts the whole month’, whilst you are still providing for their basic needs of food, schooling and a home.  Watch how the realisation of ‘need’ versus ‘want’ comes to the fore!

The benefits of pocket money

Letting your child spend as he or she pleases is an important way for them to understand the concepts behind money and to develop a sense of responsibility and independence.  This said, it is definitely a very difficult thing for parents to do.  We know and understand the value of money and have a natural instinct to protect our children so that they have money left over, but we need to let them find that out for themselves.

It is easy to assume that all kids will just fritter their money away, but you may be surprised to find that your child is quite sensible about the power behind money; especially if they have seen you lead by example. 

Savings

Encourage your children from the beginning to start saving.  10% of their pocket money is a good percentage with which to start.  (This can also be 10% of birthday money or other gifts.) Allow them to set goals for themselves.  For young children it could be a small toy, for older ones a new cell phone.  Cut out a picture of the advertisement for the item and pin it in a prominent position, such as a mirror or cupboard door, for them to see on a regular basis.  Depending on their age and the amount which they need to save, use a piggy bank or a jar, or a savings account at the bank.

Giving

The chance to help others can make a child feel very good about themselves.  For children to know that they have sacrificed something such as their pocket money to help others in need can give them a sense of purpose in life and inner satisfaction.  Help them to choose a charity such as one which involves animals or other small children, alternatively to give when they attend church.

How much pocket money should I give my child?

This is the million dollar question, if you pardon the pun!  This decision is going to vary from family to family, but do realise that there will always be another child who is getting more than your child  -  or so you will be told by your teenager!  And always remember that how much you give is going to depend on what you are expecting your child to buy with this money.

I trust this information will make you feel a little ‘richer’ for having read it.

Written by: Kirsty Scully